The Burgeoning Green Finance Market

BY STELLA LAU

WHAT ACCOUNTANTS NEED TO KNOW

The case is undeniable for the world to go green and in fact, is one of great urgency. Globally, rising temperatures, storms, droughts, melting ice sheets and rising sea levels are leading to the destruction of nature, animals, and human lives. Pandemics, too, have their root causes in climate change. Singapore is not spared – it has been experiencing higher temperatures, a rise in sea levels in the Straits of Singapore, more frequent flash floods and an increase in annual rainfall. These are threats to the country as a low-lying island and, more occurrences of heat stress also put the vulnerable at greater risk.

Green finance is the catalyst for green transition, with global momentum building up

Green finance will catalyse the green transition and global momentum is building up strongly. At the COP 26 held in November 2021, country and business leaders scaled up commitments of public and private funding for climate action. The United States will double annual public climate finance by 2024 to US$11.4 billion, while Germany is set to increase climate financing to US$6.3 billion from US$4.2 billion by 2025. In a significant agreement, the world’s two largest CO2 emitters – China and the US – jointly declared they would increase cooperation to achieve the 1.5°Celsius temperature goal set out in the 2015 Paris Agreement. Another major development was the launch of the Glasgow Financial Alliance for Net-Zero (GFANZ) that represents 450 financial firms from 45 countries with a total of US$130 million in managed assets.

Green financing is focused on the provision of financial products and services that cater to projects that lead to environmental improvement, resource conservation and the mitigation of climate change. The financing can cover project investment and financing, project operation and risk management. Green financing is part of the category of sustainable financing, which involves the provision of financing to address environmental, social and governance (ESG) initiatives. Financial instruments involve bonds and loans and work similarly to standard bonds and loans, except that the funds are channelled into projects with environmental and social benefit.

Since the inception of the sustainable finance market in 2013, more than US$4 trillion of sustainable debt have been issued. In 2021 alone, the global sustainable market amounted to US$1.6 trillion, growing with “unprecedented global traction” to double that in 2020. The Asia Pacific is one of the fastest-growing regions for sustainable finance with a jump in global share from 15% to 21% in 2021. Although late to the game, the region looks set to catch up fast.

As the world leader in renewable energy capacity growth, China has issued funding for building solar and wind farms and the development of solar and wind power technologies. This spurred record growth of new generation capacity in 2020, which increased 45% more than in 2019, according to the International Energy Agency. The fourth largest bank in the world, Bank of China, has issued green loans towards several projects in renewable energy and clean transportation. One of the projects involve building a new metro in northern China, which is expected to increasingly reduce CO2 emissions over time as passenger capacity increases. The Bank of China also committed to lending 30% of project investment for an integrated energy project to build wind and solar power capacity for electricity generation in northwest China.

China alone issued US$44 billion in labelled green bonds, which made it the second largest country for green issuance in 2020, behind the United States which issued over US$50 billion. China leads the world in spending on energy transition, with US$266 billion spent on low-carbon technologies in 2021 – more than a third of global expenditure.

ASEAN is also a key contributor to the growth of green finance in Asia Pacific. Cumulatively, the total ASEAN green, social and sustainability (GSS) market is valued at US$29.4 billion. Total ASEAN GSS bonds and loans issued reached US$12.8 billion in 2020, up from US$11.5 billion in 2019. Singapore leads in the region, accounting for close to half of the green bond and loan market in ASEAN.¹

Types of sustainable financing instruments and projects

There are several types of sustainable financing instruments. They include GSS bonds and loans as well as sustainability-linked bonds and loans.

Green bonds make up the largest share of global sustainable debt and is the most established funding type in green financing, where public or private entities borrow money to undertake projects that address climate and environmental issues. Green loans, on the other hand, are offered by financial institutions to fund green projects. Across ASEAN and in Singapore, green investment has been mainly focused on the energy sector and development of green buildings. Some examples of green financing projects in Singapore are:

• In February 2022, the Singapore government committed to S$35 billion in green bonds, issued by 2030, to fund green public-sector infrastructure projects.
• In October 2021, HSBC Singapore extended a S$6-million green trade loan to Singapore technology company Durapower Group, becoming the first participating financial institution to issue financing via the Enterprise Financing Scheme-Green (EFS-Green Scheme).
• In September 2021, Singapore’s National Environment Agency (NEA) raised S$1.65 billion in its first green bond issuance, which will be used to fund or refinance new or existing green projects. One of the projects is the Tuas Nexus integrated waste management facility, the first phase of which is due for completion by 2025. Once operational, the plant will generate electricity from waste and will also process incinerable waste, household recyclables, and food waste.
• In April 2021, utilities organisation SP Group established a green financing framework and secured its first green loan of S$100 million from DBS Bank, OCBC Bank and UOB Bank on a bilateral basis. Under the framework, SP and its subsidiaries will issue green financing instruments to finance or refinance qualified projects in clean transport, energy efficiency, renewable energy and green buildings.

The social and sustainability bond markets are still nascent in Asia compared to the western regions. In ASEAN, Thailand and Philippines are the frontrunners in this space.² Social bonds and loans are aimed at financing projects that create positive social impact, such as driving diversity and social mobility within the community, to improve socioeconomic advancement and empowerment. The positive impact could also include other social aspects, including in the provision and promotion of basic infrastructure such as clean drinking water, sanitation and energy, access to healthcare and education, among others. In 2017, Singapore saw the listing of the world’s first social sustainability bond – the US$8-million Women’s Livelihood Bonds – on a stock exchange. The Women’s Livelihood Bonds works via a special purpose vehicle to provide financing for a group of enterprises whose activities benefit women. The enterprises pay interests charged which fund coupon payments to bondholders.

Sustainability bonds and loans involve funding projects that achieve a mix of environmental and social improvement which are aligned to the United Nations’ Sustainability Development Goals (UN SDG).

Differently, sustainability-linked bonds and loans involve financing being directed to improve the borrower’s sustainability profile based on the achievement of predetermined sustainability performance targets. For example, in April 2021, in line with Earth Day, Singtel Group’s wholly owned subsidiary launched its first sustainability-linked loan of US$565 million provided by DBS Bank, OCBC Bank and UOB Bank. It features interest rate discounts linked to predetermined ESG targets in climate risk, carbon management, and workplace health and safety metrics.

Green finance will lead in the new normal, and the important role accountants can play

The growing green finance market presents a burgeoning opportunity for businesses to access financing to drive their sustainability projects and enhance their sustainability profile. Given the long-term targets set by countries around the world, the opportunity is likely to last for the next few decades and longer. According to the Asian Development Bank, Asia Pacific alone will need up to US$1.5 trillion investment per year to achieve the UN SDG goals in 2030.

Sustainability is the new normal for businesses. Investors and asset owners are assessing companies based on both financial and sustainability performance. The Singapore Exchange (SGX) explained that investors are also “expecting (companies) to fulfil obligations of repayment and returns on investment in a responsible and sustainable manner”. There has also been a reallocation of capital to sustainable assets. The Global Sustainable Investor Alliance reported a rise in sustainable assets from US$30 trillion in 2018 to US$35 trillion in 2020.

Increasingly sustainability-conscious consumers and governments globally also mean that the ability of companies to identify and address unsustainable practices and mitigate ESG risks have a direct impact on their competitive advantage and bottom lines.

Businesses must contend with regulatory implications. The Singapore Budget 2022 announced a five-fold increase in carbon pricing from S$5 to S$25 per tonne in 2024, with further subsequent increases through to 2030. This is in addition to emission standards on industries and motor vehicles.

In December 2021, SGX announced mandatory climate reporting for issuers in the financial, energy, and agriculture, food and forest products industries from 2023. Listed companies in sectors such as materials and buildings, and transportation will also be subject to mandatory reporting commencing 2024. From financial year 2022, all issuers must provide climate reporting on a “comply-or-explain” basis.

As such, finance professionals and auditors must be equipped to collect, analyse, and report on the ESG performance metrics. New sustainability reporting and disclosure standards are also being developed. At COP 26, the International Financial Reporting Standards Foundation announced the creation of the International Sustainability Standards Board, a new standards-setting board that may result in the development of global sustainability reporting standards.

Accountants can also play important strategic roles in accelerating the uptake of green finance in their organisations. Being stewards of capital and corporate reporting, the accountancy profession is in an influential position to help businesses infuse a sustainability culture and accelerate business practices in sustainability from planning and strategy to improving processes and measuring performance. They can be strategic advisors to highlight financial considerations and risks in determining the best ways to embed sustainability into their company’s strategy and decision making.

This is the first article of a two-part series on sustainability. The next article, to be published in the June issue of this journal, will discuss the risks and challenges around green financing, as well as key considerations to keep in mind as accountants support their companies to leverage green financing.

Stella Lau is Manager, Insights & Publications Department, ISCA.

¹ Budget 2022 statement, Ministry of Finance

² ASEAN Sustainable Finance State of the Market 2020, Climate Bonds Initiative

This article was first published by ISCA at the following URL: https://journal.isca.org.sg/2022/05/11/the-burgeoning-green-finance-market/pugpig_index.html?_ga=2.150295222.1496383422.1688397561-2146612896.1688397385#_ftn2